Nnews
Science | DOI: 10.1145/1467247.1467252
Gregory Goth
Betting on ideas
Advanced computational models are enabling researchers
to create increasingly sophisticated prediction markets.

The U.S. pReSiDential elections offer social scientists and statisticians many avenues for dissecting the mood of the nation. Among the well-publicized polls and surveys conducted by well-known and well-funded organizations, a lower-key method of capturing the likely outcome of the election—prediction markets—is steadily gaining attention from academic researchers and business leaders for use beyond elections, movie box-office earnings, and sporting contest outcomes.

Like other futures markets, prediction markets offer participants the opportunity to trade on their hunches, the difference being that a prediction market offers payout odds based on aggregate hunches of forthcoming events instead of prices.

screenshot from intrade.com

Prediction markets are gaining interest because the Internet allows greater worldwide access to them, as well as to the ever-increasing amount of data stored on any topic imaginable (which theoretically allows participants to make more informed predictions, individually and in aggregate). These factors, plus the enormous amount of computing power that will make it possible to instantly calculate exponentially small

odds, are stimulating new research on advanced computational models in prediction markets. These models could be capable of analyzing entire events such as the annual NCAA collegiate basketball tournament, which begins a 63-game schedule with 2⁶³ possible outcomes by the tournament’s end.

“I still think it’s a growth area,” says David Pennock, a principal researcher

at Yahoo!, who is working on expanding the capabilities of prediction market outcomes. “Yes, prediction markets get lots of attention every four years during a presidential election, but every election cycle, they get more attention than they did the previous one. The perception of them is growing, startup companies using prediction markets are emerging, and there are a lot of research questions and industry growth still.”

In fact, Pennock says, the U.S. Commodities Futures Trading Commission (CFTC) is considering expanding the use of prediction markets beyond low-bud-get research functions or “play money” markets to regulated public exchanges

 

the world’s largest prediction market, intrade, offers bets on everything from the academy awards to whether the higgs boson particle will be observed before or on a certain date.